PACRA Maintains the Rating of HBL Microfinance Bank Limited | Tier 2 Capital TFC | PKR 1.5bln | Mar-24

HBL Microfinance Bank Limited ("HBL MfB" or the "Bank") is primarily owned by Habib Bank Limited (HBL), Pakistan's largest commercial bank, which is owned by the Aga Khan Fund for Economic Development, a prominent agency of Agha Khan Development Network, a global organization that aims to enhance the quality of life in marginalized communities. The ratings of the Bank reflect a strong financial profile, strengthened by substantial support from its sponsors. HBL MfB stands out as a leading microfinance bank, holding the largest share of deposit and loan portfolios in the industry. At end-Sep24, the Bank's gross advances reported at PKR 94.7bln (end-Dec23: PKR 100.9bln). Non-performing loans rose to PKR 9.5bln (end-Dec23: PKR 2.7bln) mainly due to a credit crunch in South Punjab and the adoption of IFRS-9, which significantly increased provisioning requirements for the advances portfolio. Consequently, the Bank's infection ratio inclined to 10% (end-Dec23: 3%). The management is proactively addressing this concern. The funding is fueled by deposits, where high contributions arise from savings and term deposits. At end-Sep24, the deposit base of the Bank reported at PKR 118.5bln (end-Dec23: PKR 128.2bln). During 9MCY24, the Net Interest Margin (NIMR) declined to PKR 5.5bln (9MCY23: PKR 7.6bln). Due to high-cost deposits, increased provisioning charges, and slow recoveries in the South Region, the Bank reported a loss after tax of PKR 4bln (9MCY23: PKR 782mln). At end-Sep24, the Capital Adequacy Ratio (CAR) inclined to 16.1% (end-Dec23: 15.3%) owing to a substantial investment of PKR 6bln by its parent, HBL.
The ratings are dependent upon the Bank’s ability to aptly combat the emerging risks under the current economic scenario to keep its business and financial risk profile intact.

About the Entity
HBL Microfinance Bank Limited was incorporated in 2001 as a nationwide microfinance institution licensed by the State Bank of Pakistan. The Bank is predominantly owned by Habib Bank Limited (HBL) with 89.38%, followed by the Aga Khan Agency for Microfinance (AKAM) at 6.37%, the Aga Khan Rural Support Programme (AKRSP) at 2.36%, and the Japan International Cooperation Agency (JICA) at 1.89%. HBL, AKAM, and AKRSP operate under the umbrella of the Aga Khan Development Network (AKDN).

About the Instrument
In March 2024, the Bank issued privately placed, unsecured, subordinated, and rated Tier 2 Capital Term Finance Certificates ("TFCs" or the "instrument") amounting to PKR 1,500mln. These TFCs, with a 10-year tenor, may be listed, to enhance the Bank’s Tier II capital and strengthen the CAR. Profit is paid semi-annually in arrears at a rate of 6MK + 200 bps per annum, calculated on a 365-day basis on the outstanding principal. The first payment, due in June 2024, has been made by the Bank. Principal redemption will occur as a bullet payment at maturity. The instrument is unsecured and subordinated, with payment of both principal and profit ranking below all other liabilities, including deposits, but pari passu with other Tier II instruments and senior to Additional Tier I instruments. Early redemption is not allowed without prior approval from SBP. Additionally, neither principal nor profit can be paid—even at maturity— if such payment would result in a shortfall in the Bank's MCR or CAR.